The UAE’s commitment to sharing financial data on individuals and entities under Common Reporting Standards (CSR) has been furthered reinforced by the Insurance Authority Board of Directors Decision No. 32 of 2017 Concerning the Common Reporting Standard Regulation.
The Common Reporting Standard is the brainchild of the OECD (Organization for Economic Cooperation & Development) and acts as the global standard for the collection and mutual exchange of financial information of tax residents, with over 100 countries party to the agreement it applies to both individuals and legal entities. The UAE which is party to the agreement will especially have its work cut out being a country where almost 84% of the population is made up of expatriates.
The Common Reporting Standard requires jurisdictions to obtain information from financial institutions who are obligated to report the different types of accounts and taxpayers as well as the due diligence procedures to be followed by the financial institutions. The OECD aims to end financial secrecy in global asset holdings, promote a greater level of transparency on foreign income and reduce instances of tax evasion. Financial institutions obligated to report include banks, custodians, insurers, asset managers, trusts and foundations.
Overview of Decision No. 32 of 2017
Article 3 – Grants the UAE Insurance Authority the power to enter the premises of a Reporting Financial Institution for the purpose of verifying the information submitted and ensuring compliance with the Regulation. Compliance is not optional and non-complying Financial Institutions will be open to the penalties prescribed by the Regulation.
Article 4 – Requires Reporting Financial Institutions to retain a complete record of all information submitted for a period of five years after the date of reporting to the Insurance Authority. Financial Institutions will be able to use this data for analytical purposes to identify and understand key financial trends in reportable jurisdictions.
Article 5 – Permits harsh penalties for instances of non-compliance with the Regulations. Fines range from AED 10,000 for minor infractions to AED 250,000 for cases of significant non-compliance. In the instance of a Financial Institution affirming a false self-certification, they shall be subject to an AED 25,000 penalty. It is unclear whether a resident will be penalized for knowingly providing false self-certification.
General Due Diligence Requirements – Reporting Financial Institutions must provide information on reportable accounts annually. If Financial Institutions do not have the capacity to provide such reports, external service providers can be employed to fulfill such reporting and due diligence requirements.
High Value Accounts – Will be subject to an enhanced review process including review of all electronic searchable data (and paper searchable data if the electronic data doesn’t contain all the information required). High value accounts will be treated as Reported Accounts if the account relationship manager has knowledge that the account is held for tax purposes in another jurisdiction.
Individual Accounts – Reporting Financial Institutions must obtain a self-certification to determine the account holder’s residence for tax purposes. The account will be treated as a reportable account if the self-certification establishes that the holder is a resident for tax purposes in a reportable jurisdiction.
Pre-existing Entity Accounts – Only accounts with an aggregate balance or value in excess of 250,000 USD as of December 31st, 2016 or calendar year must be reviewed in accordance with the Regulations. Review of such accounts must be completed by December 31st, 2018.
New Entity Accounts – will be considered as Reportable Account if it can be established that the account holder is a resident in a reportable jurisdiction. If the account holder is a passive NFE with one or more of the controlling persons being a reportable person then the account shall be considered reportable.
What are the Implications for Reportable Financial Institutions?
Financial Institutions have a responsibility to take necessary steps to identify ‘reportable accounts’, whereby the beneficial owner of the account is a resident of a reportable jurisdiction, meaning a jurisdiction which has signed up to the CRS. Once ‘reportable accounts’ have been identified, Financial Institutions are obligated to annually report the financial information to the local authorities who will, in turn, pass that information on to the tax authorities where the account holder is resident.
While the cross-border exchange of account information is vital to the global effort to crackdown on tax evasion, it poses many difficulties for Financial Institutions who now face the burden of compliance costs and an increased risk of legal exposure should they fail to comply with the Regulation.
Financial Institutions also need to be extremely vigilant when it comes to data protection of confidential information. As they are required to share the tax information of local residents with government agencies, they need to comply with data protection procedures of a reportable jurisdiction which may or may not be the same as in the UAE.
It remains to be seen how the UAE Financial Institutions will fare under their CRS obligations as the first exchange of information is scheduled to occur on September 30TH, 2018. The success of CRS will be dependent on a reciprocal exchange of information with all countries exercising a high standard of due diligence, without this it amounts to little more than a costly exercise.